Stock Market Falls and Buying Businesses

The FTSE 100 has now fallen in value by 40% in the last year. This means that the value of the biggest 100 companies in the UK has fallen on average by 40%. But are these businesses really worth 40% less than they were a year ago?

These businesses would be worth less if firstly their profits reduced, but you still have some businesses such as Tesco’s whose profit has increased in the last year. Oil companies are still doing ok as well. But certainly for the vast majority of these 100 businesses their profits have not reduced by 40%.

What has reduced is the earnings per share or the factor applied to the business - their long term prospects.

But even then the long term prospects for those businesses have not worsened by that amount. The factor behind these falls is fear.

And this fear happens with smaller businesses as well, the owner of a small business thinking twice about whether he actually wants to sell because he might not be able to retire now due to his other investments not doing so well. Or the fear of the buyer not wanting to jump into the frying pan.

I can often see a trend when bad news is released by the media, the number of enquiries for businesses for sale reduces or even stops for a short period of time until they have forgotten about it and started to look again. Its illogical as Mr Spock might say.

You would not close a business on the basis of a few days trading so why react in the short term. Again the answer is fear. In both of these situations, the person in question created a seemingly unsurmountable obstacle that exists solely in their imagination.

People should however be looking at the longer term in these decisions. To get rid of the fear, simply work out what you will do in each of the possible scenarios.

This is called long term planning! This is the basis on which any business decision should be based not on the BBC or Sky News report for that lunchtime bulletin.

This entry was posted on 10/10/2008 at 12:36 pm and is filed under Buyers, The Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.